The Impact of Corporate Governance on the Relationship between Investment Opportunities and Dividend Policy: An Endogenous Switching Model Approach


  • Acknowledgments: The authors are grateful for helpful comments from two anonymous referees. We also thank Dr. Jun-koo Kang, special editor of the journal, for his valuable suggestions. Any remaining errors and omissions are the authors’ responsibility.

Corresponding author: Chung-Hua Shen, Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei City 106, Taiwan. Tel: 886-2-3366-1087, Fax: 886-2-8369-5817, email:


This study investigates the role of corporate governance in the relationship between investment opportunities and dividend payouts. The study sample is divided into strong and weak governance regimes to investigate outcome and substitute effects, where the former stresses the negative relationship between investment opportunity and dividend payouts in a strong governance regime while the latter emphasizes the positive relationship between the two in a weak governance regime. Using the endogenous switching model on a sample of Taiwan publicly listed firms from 2000 to 2009, this study concludes that the substitute model hypothesis is supported using different governance variables, but no outcome effect is identified.